Buy to Let Yields Outpaced Pensions Over Last Decade

Returns on buy to let have outpaced other investments over the first decade of this century, according to a property research firm.

Yields on investment property are running at more than double those returned by the best other assets classes – except gold and some other precious metals

Gold soared by 550% in 10 years – from $225 an ounce to around $1,400, while residential letting property showed a 7.1% annualised yield.

At the same time, shares returned just 0.8%, gilts 3% and commercial property 3.7%, says the research firm IPD.

The latest official figures also show that many retirement savers turned their back on traditional pensions, despite the tax breaks on contributions.

According to the Department of Work and Pensions, the number of savers contributing to pensions dropped around 18% in the last 10 years – from 46% to 38% of all employees.

At the same time, the Office of National Statistics record the number of buy to let doubling from just over 2 million homes to almost 4 million homes.

Commenting on the move towards buy to let, Robin Goodchild, of LaSalle Investment Management, said: “The market is in a challenging position today. While first time buyers struggle to get on the ladder, and their numbers are set to increase by 1.5 million in the next decade, the construction industry is stuck at absolutely inadequate levels and based on a broken mortgage debt model.

“Meanwhile, on the demographic side we have a rising population, as well as migration to parts of the country where pressures are greatest. As a result there has been a growth in demand in the private rented sector.”

While Mark Callender, head of research at Schroder Property Investment Managment, contends the buy to let model is broken.

“We are not against residential property; instead our real concern regards investment timing, and the wisdom of investing in market let residential over the next few years,” he said.

“There are two important differences between commercial and residential property. Firstly, while returns in the commercial sector are driven by income return, they are the opposite in the residential sector, with the majority of fund performance a result of capital growth. Secondly, while commercial prices are fixed by rents and yields, in the residential sector prices are dictated by the owner occupier market, without reference to rents and occupier demand.

“While yields are an integral part of determining values and prices in the commercial sector, in residential this is something of an afterthought. This also explains why in the sector we have this discount to vacant possession value, which is a paradox in the UK market, meaning a vacant possession is worth more than one that is let.”

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